El Segundo, Calif., Oct. 3, 2007—LCD manufacturers hoping to extend the current streak of price increases for their desktop PC monitor panels are ignoring troubling signals regarding consumer demand, setting themselves and the rest of the monitor market up for a prolonged fall in 2008, iSuppli Corp. is warning.
Six months of supply shortages and price increases have boosted LCD panel manufacturers’ profit margins to record levels. Suppliers of panels for desktop PC monitors have benefited from a combination of strong factory demand, tight production controls and the highly-competitive nature of the end market.
However, this situation has been tough on the panel suppliers’ customers, the monitor vendors, which are struggling to retain ever smaller margins amid aggressive price competition. This intense competition has made it all but impossible for branded monitor vendors to pass along the full impact of the panel increases to their customers.
“Flush with success, panel manufacturers are pushing for further price increases in October,” said Rhoda Alexander, director, monitor research, for iSuppli. “However, there are signs that end demand is softening. Inventories of finished monitors are rising, indicating that a gap is forming between factory demand and end-user demand and the most expensive monitors manufactured this year are still on container ships sailing to end markets. To survive, branded monitor vendors will need to reclaim some profit margin, which will necessitate price increases for end-users. That will result in a market slowdown, a return to oversupply, and a long period of adjustment during which panel pricing drops and overpriced inventories clear.”
All this will amount to serious revenue challenges for the entire monitor supply chain heading into 2008, Alexander warned.

Growth factors
While factory demand growth for LCD desktop PC monitor panels was impressive in the second and third quarters of 2007, a deeper look at the elements fueling the sales highlights some underlying instability.
Unseasonably strong end-user demand in the second quarter, which is normally the softest sales period of the year, contributed to the growth. However, market-share battles were a much bigger factor driving up factory demand during the period.
Being propelled by competitive considerations, these battles are somewhat removed from actual sales growth, creating a disparity between factory demand and end demand.

Extreme PC fighting
At the heart of the imbalance is the market-share battle among four major PC OEMs: Hewlett-Packard, Dell, Lenovo, and Acer. These four companies account for nearly 40 percent of today’s LCD monitor sales and are at the center of the factory push for LCD monitor panels. While most of the standalone monitor vendors are now reporting normal to above-normal inventory levels, several of the large PC vendors are still struggling to fill orders in key product categories—primarily 17-inch SXGA, 19-inch SXGA, and 22-inch WSXGA panels.
With each of these OEMs determined to expand its market share, all of them loaded up on LCD monitors in the second and third quarters in preparation for a major battle for end-of-year sales.

An unbalanced market
Add to this the earlier-than-normal purchasing cycle in 2007 and the growing gap between panel manufacturing, monitor production and end-user sales in the second quarter of 2007 is not surprising or particularly alarming. The much more ominous sign is the indication of a growing imbalance in the third quarter and beyond.
Figure 1 attached presents iSuppli’s analysis of monitor manufacturing compared to consumption for the period of Q306 through Q207.

Snowball effect
The difficulty with market share battles is someone inevitably ends up losing. With each of the major PC vendors stocking up to be the winner, at least one of them is going to be stuck with a lot of excess inventory at year-end.
There are already signs of trouble in the standalone monitor market. For a growing number of vendors, product arrivals are starting to outpace sales and their inventories are now expanding too rapidly. The situation is particularly acute in the North American market, where sales are lagging behind vendors’ initial projections.
The bigger area of concern is the difficulty vendors have encountered when trying to push through price increases. Monitor vendors are facing a tough choice between share growth and profitability. Steady panel price increases have worked to slow street-price declines and have spurred moderate price increases on individual models. However, the average street price has continued to fall as users have migrated to less-expensive choices within their preferred product category. In some cases that has meant changing brands. In others, it means changing screen sizes or models.

Delayed impact
Complicating this further is the one-to-two-month delay between a factory price increase and the arrival of that product at the channel level.
Thus, even if panel manufacturers respond immediately with a price cut, it will still take several months for the higher-priced inventory to clear the channel. Meanwhile, branded vendors have seen their profit margins on a number of products slide significantly. Vendors still have to pay shipping, insurance, warehousing and warranty costs. As for channel participants, they have been unwilling to sacrifice their margins, leaving branded vendors to absorb the difference.
Figure 2 attached presents the factory costs of 19-inch WXGA monitors vs. the average street price trend.

Holiday depression
The longer the price increases continue, the more difficult it becomes for branded vendors to absorb the cost increase. With end-users expecting sale prices for the holiday season, branded vendors are caught in a price squeeze. Holiday promotional efforts may delay street price increases—but that will hurt rather than help the market in the long-term, as it sets end-user expectations well below the actual costs of production.

The inevitable adjustment
Panel manufacturers had hoped to avoid a repeat of the down cycle of late 2006 and early 2007. However, they have set market conditions for a repeat.
For more on the monitor industry, please see Alexander’s latest report entitled: Monitor Unit Growth in Q207 Comes at Steep Price. To learn further details about this report, please visit: http://www.isuppli.com/catalog/detail.asp?id=8687